About Home Loans
Owning a house is part of the “Great Australian Dream” for many and over the past decades ownership rates in Australia have fluctuated by only a few percentage points. Currently, home ownership rates are just under 70%.
Whether a unit or house though, buying a home takes a great deal of planning. It is likely to be one of the largest financial commitments you will ever make – and your home loan is likely to be one of the largest debts you ever commit to. So it’s worth spending the time upfront to get it right! CANSTAR assess approximately 1,100 home loans from more than 30 providers across Australia, to help you compare home loans find an outstanding-value loan to suit your needs.
What is a home loan?
A “home loan” or “mortgage” is a loan advanced to you by a financial institution in return for security over the property you are using the loan to buy. Typically a home loan will be a 25 or 30 year term, with regular repayment amounts fortnightly or monthly that are designed to pay off the loan over the contracted term.
The loan is secured against your property so if you are unable to continue paying the loan, the lender may ultimately require you to sell the property to settle the debt.
Given property prices in Australia, a home loan is realistically the way by which the majority of people will afford to buy a house.
Types of home loans
There are a number of different types of home loans in Australia. The three most common types of home loans are:
A fixed rate home loan:
The fixed rates on home loans are historically low at present. A fixed rate loan simply means that the interest rate is “fixed” for a certain amount of time – commonly 1, 2,3, 4 or 5 years.
The main advantage of a fixed rate loan is that it gives you certainty of repayments over the fixed term; because the interest rate is guaranteed not to go up (or down) over the fixed period, it can be a way to budget your costs.
The main disadvantage of a fixed rate loan is the inflexibility: generally large additional payments cannot be made and you may face a “break fee” if you decide to sell before the end of the fixed term.
A variable rate home loan:
A variable rate loan means that the interest rate will rise and fall (vary) over the period of your home loan. This may be in response to movements in the official cash rate or may simply be a business decision by your financial institution.
The main advantage of a variable rate loan is flexibility. While you must meet your minimum monthly repayment, you can usually pay more if you want to. There is also no cost penalty if you decide to sell your property and move. Read about potential cost penalties here.
The main disadvantage of a variable rate loan is that your minimum repayment amount may rise or fall at any time. If you are on a tight budget, this could be a real problem for you.
A split home loan:
A split loan is simply a combination mortgage whereby part of your home loan is on a fixed rate and part is on a variable rate.
When choosing the type of loan that would suit, first home-buyers should consider how long they intend to stay in the home. If the intention is only for a short while, a variable loan is more flexible and doesn’t entail “break fees”. On the other hand, if the intention is to live in the home long term, a fixed rate may offer the certainty of repayments the borrower is looking for. Of course, a split loan can be a good option, providing both flexibility and security.
An interest only home loan:
An interest-only home loan is one where only the interest is paid, rather than both the interest and the principle. This type of loan can be useful for investors who can claim the interest as a tax deduction, or buyers who only plan on holding onto the property for a few years before selling it. Interest-only home loans may not be a good idea for standard home-buyers simply looking to pay less on their weekly repayments, because the smaller the amount of loan principal that is paid off, the more overall interest you may end up paying on your loan over the years. Find out more about interest only home loans here.
Generally an interest-only home loan will have a short time frame (between 1 – 5 years) before it reverts to a principal and interest loan.
A line of credit home loan:
A line of credit is a loan borrowed against the equity in your home. It gives you the ability and flexibility to access the loan at any time, up to the agreed limit, and to pay money into the loan at any time. It is not generally a loan set up to purchase a property, but rather set up against the equity in an existing property. You can compare line of credit loans here.
Home loan fees
There are a number of fees that may apply to your home loan. Some of the common home loan fees are:
Account keeping fee:
An account-keeping fee is a fee charged by lenders (often monthly) to help cover the administration cost of maintaining the loan. It may be called a “service fee”.
Some lenders may charge an annual fee rather than an ongoing account-keeping fee on certain mortgages. These may be a “package loan” where a number of deposit and credit accounts as well as your home loan are “packaged” up under one administrative cost.
If your home loan has a redraw facility (an agreement whereby you are able to redraw some or all of any home loan payments in advance) there may be a fee associated with doing so.
Other ad-hoc fees may include a loan application fee and a valuation fee at the time of property purchase, a late payment fee if you miss a loan repayment and a discharge fee if you pay your home loan off early.
You should ask your lender to detail all fees that may apply to your home loan.
Other home loan features
There are many different features that may be attached to your home loan. These can include:
- An offset account
- A redraw facility
- The ability to make extra repayments
- The ability to split the loan between fixed and variable
- The ability to switch to a different type of loan
- Ability to pre-pay interest
- Online functionality
- Lending terms, including the LVR (loan to value ratio) allowable
- Guarantor security availability
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